12) A well-maintained house and yard is an example of A) a positive externality. B) a negative externality. C) a public good. D) logrolling.

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1 1) All of the following statements about asymmetric information are true EXCEPT: A) Asymmetric information occurs when one party to a transaction has relevant information to the transaction that the other party does not have. B) Asymmetric information creates market failures because it makes it harder for individuals to engage in transactions that would take place in the presence of perfect information. C) Asymmetric information can only be solved through government intervention. D) Asymmetric information occurs in the market for used cars and in the insurance market. 2) Adverse selection and moral hazard are examples of A) asymmetric information. B) selection problems. C) risk aversion. D) mechanism designs for dealing with informational problems. 3) As a result of adverse selection problems in the health insurance market, it is likely that over time A) fewer healthy people will be insured. B) fewer unhealthy people will be insured. C) fewer healthy and unhealthy people will be insured. D) more healthy people will be insured. 4) Universal health coverage, lemon laws, and dealer warranties are all examples of tools used to reduce A) moral hazard. B) risk premiums. C) market efficiency. D) adverse selection. 5) Life insurance companies require that prospective policy holders have a medical check- up before the companies will sell the policy because of a(n) problem in which the insured could be than expected. A) moral hazard; healthy and live longer B) moral hazard; unhealthy and die sooner C) adverse selection; healthy and live longer D) adverse selection; unhealthy and die sooner 6) You cause an automobile liability insurance company to face a moral hazard problem when you take driving precautions you buy automobile liability insurance from the company. A) fewer; after B) more; after C) fewer; before D) the same; before and after

2 7) A lender faces a(n) problem if borrowers with a greater chance of defaulting on their loans get loans from the lender. A) adverse selection B) moral hazard C) external cost D) free- rider 8) A lender faces a(n) problem when the lender lends funds to a borrower for a specific purpose and the borrower then opportunistically uses the funds for another purpose. A) adverse selection B) moral hazard C) external cost D) free- rider 9) Warranties, education, extracurricular activities are all examples of A) market signals. B) risk premiums. C) tools that can correct the moral hazard problem. D) incentives. 10) An externality is A) a cost or benefit resulting from some activity or transaction that is imposed or bestowed on parties outside the activity or transaction. B) the total cost to society of producing an additional unit of a good or service. C) the amount a consumer pays to consume an additional amount of a particular good. D) a problem intrinsic to public goods: The good or service is so costly that its provision generally does not depend on whether or not any single person pays. 11) Air pollution generated by a steel mill is an example of A) a positive production externality. B) a negative production externality. C) a public good. D) the free-rider problem. 12) A well-maintained house and yard is an example of A) a positive externality. B) a negative externality. C) a public good. D) logrolling.

3 13) Education generates external benefits. When these external benefits are not considered, the market will produce A) an efficient level of education. B) more than the efficient level of education. C) less than the efficient level of education. D) zero units of education. 14) If the production of a good generates external benefits, the government could increase efficiency by A) taxing the production of the good to reduce the amount produced. B) subsidizing production of the good to increase the amount produced. C) regulating production of the good to reduce the amount produced. D) requiring all producers of the product to be licensed to produce the product. Refer to the information provided in Figure 16.2 below to answer the questions that follow. Figure ) Refer to Figure The marginal damage cost imposed as a result of producing automobiles is A) $5.00 per car. B) $10.00 per car. C) $15.00 per car. D) indeterminate from this information. 16) Refer to Figure To force this firm to produce the efficient level of output, the government should impose a tax of A) $5.00 per car. B) $10.00 per car. C) $15.00 per car. D) an amount that is indeterminate from this information.

4 17) Refer to Figure The efficient amount of cars is A) 25. B) 35. C) zero because any production results in an external cost. D) indeterminate from the information given. 18) Refer to Figure The unregulated (market) amount of cars is A) 25. B) 35. C) zero because any production results in an external cost. D) indeterminate from the information given. 19) The total cost to society of producing an additional unit of a good or service is the marginal A) external cost. B) damage cost. C) social cost. D) private cost. 20) In the presence of negative externalities, is produced and in the presence of positive externalities, is produced. A) too little of the good; too much of the good B) too much of the good; too little of the good C) too much of the good; the right amount of the good D) the right amount of the good; too little of the good 21) If the government wishes to encourage firms to internalize externalities, they should activities resulting in negative externalities and activities resulting in positive externalities A) tax; subsidize B) subsidize; tax C) ban; generate D) place an injunction against; tax 22) An external cost is A) MSC + MC. B) MSC - MC. C) MSC/ MC. D) MSC MC.

5 23) The Coase theorem states that A) the private sector will fail to produce the efficient amount of a public good because of the free-rider problem. B) under certain conditions, private parties can arrive at the efficient solution without government involvement. C) if there are external costs in production, the government must intervene in the market to assure that the efficient level of output is produced. D) public goods should be produced up to the point where the additional benefit received by society equals the additional cost of producing the good. 24) Your roommate has the right to play her stereo during the day. But you find the best time to study is during the day, and the stereo playing makes it hard for you to concentrate. You tell your roommate that you will do her laundry every week if she does not play the stereo during the day and she agrees to this. This is an example of the A) free rider problem. B) drop-in-the-bucket problem. C) Coase theorem. D) fallacy of composition. 25) When the government pays part of my university education, it is A) internalizing an external cost. B) using taxes to discourage an external cost. C) subsidizing an external benefit. D) using direct regulation to discourage an external cost. 26) Public goods represent a market failure because A) they are provided by firms with market power. B) positive externalities are created through their production. C) by their very nature they are nonexcludable and nonrival, which makes it difficult for the private sector to supply them profitably. D) there is incomplete information regarding their quality. 27) Private goods are A) rival in consumption, and their benefits are excludable. B) nonrival in consumption, and their benefits are excludable. C) nonrival in consumption, and their benefits are nonexcludable. D) rival in consumption, and their benefits are nonexcludable. 28) Which of the following contains most of the characteristics of a public good? A) education B) trash collection C) a public library D) national defense

6 29) A radio signal broadcast through the air is in consumption, and listeners are. A) rival; excludable B) nonrival; excludable C) nonrival; nonexcludable D) rival; nonexcludable 30) A television signal sent by cable is in consumption, and viewers are. A) rival; excludable B) nonrival; excludable C) nonrival; nonexcludable D) rival; nonexcludable 31) If one person's enjoyment of the benefits of a good does not interfere with another's consumption of it, the good is A) excludable. B) nonexcludable. C) rival in consumption. D) nonrival in consumption. 32) If, at a low cost, you cannot prevent a person from benefiting from the consumption of a good you produced, the good is A) excludable. B) nonexcludable. C) rival in consumption. D) nonrival in consumption. 33) The free-rider problem arises A) when people feel their contribution is so small relative to the total amount needed that it won't make a difference whether they contribute or not. B) when people realize they will still receive the benefits of a good whether they pay for it or not. C) whenever the government produces a good or service. D) whenever there is a surplus of the product in the market. 34) You will still be able to listen to NPR (National Public Radio) whether or not you contribute to their fund-raising campaign, so you decide not to contribute. This is an example of the A) private good problem. B) free-rider problem. C) rival in consumption problem. D) drop-in-the-bucket problem.

7 35) Education is a good that creates a externality. A) public; positive B) private; positive C) public; negative D) private; negative